Essar Steel Takeover Bid and Legal Issues

  • Category
    Economy
  • Published
    28th Mar, 2019
  • The National Company Law Appellate Tribunal (NCLAT) refused to stay a bankruptcy court order approving global steel giant ArcelorMittal's Rs 42,000 crore takeover bid for Essar Steel.
  • However, it sought a fresh plan for the distribution of bid amount between financial and operational creditors of the debt-laden firm.

Issue

Context:

  • The National Company Law Appellate Tribunal (NCLAT) refused to stay a bankruptcy court order approving global steel giant ArcelorMittal's Rs 42,000 crore takeover bid for Essar Steel.
  • However, it sought a fresh plan for the distribution of bid amount between financial and operational creditors of the debt-laden firm.
  • Making a suggestion, the NCLAT said all operational creditors below Rs 1 crore should get 100 per cent of the dues and so should the employees of Essar Steel. Only 90 per cent of Rs 42,000 crore should be allowed for financial creditors.

About:

  • Essar Steel directors had challenged Ahmedabad-bench of National Company Law Tribunal's (NCLT) nod to global steel giant ArcelorMittal SA's bid for the debt-laden company on the plea that their offer of Rs 54,389-crore was superior as it clears 100 per cent outstanding of both financial and operational creditors.
  • ArcelorMittal's Resolution Proposal involves financial creditors getting Rs 41,987 crore out of their total dues of Rs 49,395 crore. Operational creditors, under the plan, would get just Rs 214 crore against the outstanding of Rs 4,976 crore.
  • If the ArcelorMittal plan is implemented, Standard Chartered will only get Rs 60 crore against its claims of Rs 3,187 crore from Essar Steel.

Background:

  • Standard Chartered moved the NCLAT against the plan as its counsel contended that the bank was being given only 1.7 per cent of its total dues from Essar Steel while other financial creditors, forming part of the Committee of Creditors (CoC), were getting over 85 per cent of their dues.
  • NCLAT is of the view that the CoC cannot reserve 92% of the bid amount for financial creditors and leave just 4% for operational creditors.
  • The CoC, however, opposed proposal to give 10% to operational creditors, saying they had approved ArcelorMittal's bid for Essar Steel based on the money that secured lenders are able to recover from the insolvency process.

Analysis

Financial and Operational Creditors:

  • Financial creditor: According to Section 5(7) of the IBC it is defined as - a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.
  • Operational creditor: Under Section 5(20) of the IBC it is defined as - any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred e.g. Wholesale vendor of spare parts whose spark plugs are kept in inventory by car mechanics and who get paid only after the spark plugs are sold is an operational creditor.

Tribunals are reluctant in entertaining petitions from any person who does not fall under the definition of financial creditor or operational creditor according to the IBC. To initiate business insolvency proceedings under the Code, this requirement must be satisfied.

IBC process:

  1. Application to the NCLT:

A financial or operational creditor can apply to the National Company Law Tribunal (NCLT) for an order to admit the debtor into the corporate insolvency resolution process (CIRP). The creditor has to show that there has been a default in the payment of its debt exceeding 1 lakh rupees. The NCLT has to pass an order either admitting or denying the application within 14 days.

  1. Interim resolution professional:

Once a corporate debtor is admitted into the CIRP, its board of directors is suspended and its management is placed under an independent interim resolution professional. From this point on and until the end of the CIRP, the erstwhile management ceases to have any control over the affairs of the company.

  1. Formulation of COC:

The interim resolution professional will then invite and verify claims made by the corporate debtor’s creditors, classify them, and within 30 days of the admission into CIRP, form the Committee of Creditors (COC), comprising all the financial creditors of the corporate debtor.

  1. Appointment of the resolution professional:

The COC then appoints an independent person to function as the resolution professional for the remainder of the CIRP term. The resolution professional may be the same person as the interim resolution professional, or someone else, depending on what the COC wants.

  1. Approval of the resolution plan or liquidation:

Within 180 days from the start of the CIRP, a resolution plan for the revival of the company needs to be approved by creditors holding 75% of the financial debt.

  1. If a plan is approved within this period and is sanctioned by the NCLT, it is adopted and becomes binding on all stakeholders involved in the CIRP.
  2. And if no resolution plan is approved in this period, the NCLT is required to order the liquidation of the corporate debtor. If an order of liquidation is passed, a liquidator will be appointed by the COC to sell the assets of the corporate debtor and distribute the assets among the stakeholders.

Operational effectiveness of the programme:

In the past two years since the Insolvency and Bankruptcy Code came into being, 701 companies have been admitted under the corporate insolvency resolution process and only 22 resolution plans have been approved, around 87 firms are heading for liquidation and the CIRPs of 525 firms are still under way as of June 2018.

  • There is a growing concern that the Insolvency and Bankruptcy Code (IBC) has taken a bit too long in resolving cases of corporate indebtedness — much beyond the stipulated outer limit of 270 days.
  • Under the liquidation process, financial and operational creditors are less likely to recover the full-value of their dues, while employees may not get their full salaries.

Challenges to resolution process:

  • For the financial creditors, the insolvency resolution process granted a proper way to get back the debt amount with time. However for the operational creditors, who are supposed to be paid almost instantly, there is not a lot ways.
  • Within the voting pattern of the committee of creditors, there is an issue where operational creditors votes who were not fully willing, they were forced.
  • The code is not well communicated to the rural regions of the country.

Way forward:

  • Due to rapid increase in the number of cases to be referred to NCLT under IBC it is imperative to create additional benches to minimize the delay in the resolution process.
  • New initiatives such as Samadhan and Sashakt which aim to encourage Pre-NCLT resolution for stressed companies may also lead to reducing the burden and effective utilization of the NCLT benches and avoid value diminishing due to delay in the resolution process at NCLT.
  • Training and support to Insolvency professionals is required to ensure that a high level of competence and professionalism is maintained in the resolution process.
  • In case of non-completion of the CIRP in 270 days, the adjudicating authority is required to pass an order to liquidate the corporate debtor. However, in most cases, the tribunal has further extended the process. Although the extensions are being granted with the right intention and aimed towards maximization of value, they are setting a bad precedent. This should be stopped.

Learning Aid

Practice question:

Although India has managed to improve its ranking in both the World Bank’s Ease of Doing Business as well as the World Economic Forum’s Competitiveness Index, but World Bank Data shows that India still performs poorly on debt resolution with other BRICS countries. Discuss how changes in Insolvency and Bankruptcy Code can help India improve its current standing.

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